CBO

STAFF

MEMORANDUM

MANDATORY SPENDING:

TRENDS

AND

SOURCES OF GROWTH

July 1992

CONGRESSIONAL BUDGET OFFICE

SECOND AND D STREETS, S.W.

WASHINGTON, D.C. 20515
This Congressional Budget Office (CBO) Staff Memorandum was prepared

in response to inquiries from the House and Senate Committees on the

Budget about the sources of growth of mandatory spending and the potential

impact on federal spending of capping the growth of these programs. The

memorandum summarizes recent trends in the growth of mandatory spending,

presents CBO's estimates of mandatory spending for the next five years, and

describes the sources of growth in mandatory spending programs. It also

discusses recent proposals for capping the growth of mandatory spending,

presents estimates of the savings that would result from several such caps, and

points out that if such caps were adopted, the specific means of implementing

them would need to be developed. Finally, the paper presents several options

for achieving savings in the largest mandatory program, Social Security, and

the two fastest growing mandatory programs, Medicare and Medicaid. In

keeping with CBO's mandate to provide objective and impartial analysis, the

memorandum contains no recommendations.

This memorandum was prepared by Patrick Purcell of CBO's Budget

Analysis Division under the direction of Chuck Seagrave and Paul Van de

Water. Nancy Gordon and Kathryn Langwell of CBO's Human Resources

and Community Development Division, and Jim Horney, C. G. Nuckols, and

Kathy Ruffing of the Budget Analysis Division, provided valuable comments.

Chris Spoor edited the manuscript. Emma Tuerk prepared the final version

of the manuscript. Questions about the analysis may be addressed to Patrick

Purcell at (202) 226-2820.
CONTENTS

INTRODUCTION 1

MANDATORY OUTLAYS FROM 1965 THROUGH 1990 2

PROJECTIONS OF MANDATORY SPENDING AND OTHER

OUTLAYS THROUGH 1997 4

PROJECTIONS FOR INDIVIDUAL MANDATORY PROGRAMS

THROUGH 1997 6

SOURCES OF GROWTH IN MANDATORY SPENDING 9

MANDATORY CAPS AS A MEANS OF CONTROLLING

ENTITLEMENT SPENDING 14

OPTIONS FOR SLOWING THE GROWTH OF SOCIAL

SECURITY, MEDICARE, AND MEDICAID 17

Social Security 17

Medicare 19

Medicaid 21

CONCLUSION 23
TABLES

1. Federal Outlays for Selected Fiscal Years,

1965-1990 3

2. CBO Baseline Projection of Federal Outlays

Through 1997 5

3. CBO Baseline Projection of Mandatory Outlays

Through 1997 7

4. Average Annual Rate of Growth of Mandatory Spending,

1985-1997 8

5. Sources of Change in Total Mandatory Spending,

Fiscal Years 1992-1997 10

6. Sources of Change in Spending for Individual

Mandatory Programs, Fiscal Years 1992-1997 13

7. Projected Mandatory Spending Under a Cap on Growth 15
INTRODUCTION

In fiscal year 1991, federal spending for entitlements and other mandatory

programs, excluding deposit insurance and net interest, reached $636 billion,

almost half of all net federal outlays.1 (Mandatory outlays are payments that

the federal government must make under current law.) All other activities of

the federal government-comprising defense, domestic discretionary spending,

international discretionary spending, deposit insurance payments, and net

interest payments-accounted for $794 billion in federal outlays last fiscal year.

Entitlements and other mandatory spending, especially the Medicare

and Medicaid programs, constitute the fastest growing segment of federal

spending. The Congressional Budget Office (CBO) estimates that outlays for

mandatory programs under current law will increase at an average rate of 7.4

percent a year from 1991 through 1997, while the balance of federal spending

will rise by an average of 1.5 percent a year during the same period.2

Managing the growth of federal spending therefore will be largely a matter of

controlling the growth of mandatory spending. Gaining control of this

spending will require an understanding of why outlays for mandatory programs

are growing so rapidly.

Entitlement programs make payments to any person, business, or unit

of government that seeks the payments and that meets eligibility criteria

established in law. The Congress controls these programs indirectly by

defining eligibility and setting the benefit or payment rules, rather than

directly through the annual appropriation process. There are two categories

of entitlement programs: means-tested and non-means-tested. Means-tested

programs provide benefits only to people whose income and other financial

resources are below the levels set by the rules of each program. The major

means-tested entitlement programs are Medicaid, Food Stamps, Aid to

Families with Dependent Children (AFDC), Supplemental Security Income,

and veterans' pensions.3 Means-tested programs account for about 20

percent of all mandatory federal spending.

By far the greater portion of mandatory federal spending, 80 percent,

comprises programs that are not means-tested. Most non-means-tested

mandatory programs are social insurance programs that are funded at least

in part by contributions from the covered population. The largest of these

Gross federal outlays in fiscal year 1991 were $1,431 billion. Offsetting receipts of $106 billion reduced net

outlays to $1,323 billion.

CBO estimate, assuming current law.

Not all means-tested programs are entitlements. Some federal housing programs and social service

programs that are funded through discretionary appropriations are also means-tested. These programs are

relatively small compared with means-tested entitlements.
programs are Social Security and Medicare, which together account for about

three-fifths of mandatory expenditures. Another 10 percent of mandatory

spending consists of retirement and disability programs for federal employees

and the military, and the remainder comprises Unemployment Compensation,

Veterans' Compensation, farm price supports, social services, and other,

smaller programs.

Two other categories of spending are also controlled only indirectly by

Congress and therefore can be classified as mandatory spending. These are

net interest payments and deposit insurance payments. Net interest is the

interest that the federal government pays to the owners of U.S. Treasury

securities, net of interest income the government receives on loans it has

made to people, businesses, or foreign countries. Interest payments are a

contractual obligation of the federal government to the owners of Treasury

securities and are therefore mandatory outlays. Deposit insurance payments

are federal funds paid to the depositors of federally insured banks or savings

and loans that have become insolvent, or to institutions that have purchased

insolvent banks and thrifts from the federal government. Because deposit

insurance payments represent an obligation of the federal government to the

depositors of federally insured financial institutions, they too are considered

mandatory spending. The analysis in this paper will focus on mandatory

spending other than net interest payments and deposit insurance payments.

MANDATORY OUTLAYS FROM 1965 THROUGH 1990

Examining federal expenditures since 1965 reveals two trends in mandatory

spending. First, mandatory spending grew more rapidly relative to gross

domestic product (GDP) in the 1965-1975 period than it has since then (see

Table 1). Second, even though the growth of total mandatory spending

relative to GDP has slowed since the mid-1970s, expenditures for Medicare

and Medicaid have continued to increase as a share of GDP.

Three programs-Medicare, Medicaid, and Social Security-caused most

of the growth in federal spending relative to GDP from 1965 through 1990.

In 1965, Medicare and Medicaid had just been created and had negligible

outlays; Social Security spending in that year was equal to just 2.4 percent of

GDP. Twenty-five years later, the combined spending of these three

programs equaled 7.1 percent of GDP. Spending for other mandatory

programs, in contrast, was only slightly greater as a share of GDP in 1990

than it had been in 1965, and it has fallen steadily since reaching a peak

relative to GDP in the mid-1970s.
TABLE 1. FEDERAL OUTLAYS FOR SELECTED FISCAL YEARS,

1965-1990

1965 1970 1975 1980 1985 1990

In Billions of Dollars

Mandatory Programs

Social Security

Medicare

Medicaid

Other mandatory outlays*

Subtotal

Deposit Insurance

Net Interest

Discretionary Spending

Offsetting Receipts

Total Outlays

Gross Domestic Product

As

Mandatory Programs

Social Security

Medicare

Medicaid

Other mandatory outlays*

Subtotal

Deposit Insurance

Net Interest

Discretionary Spending

Total Outlays

17

0

0

13.

36

0

9

82

.£

118

703

30

7

3

20.

69

-1

14

125

-12

196

1,011

a Percentage of

2.4

0

0

2.7

5.2

-0.1

1.2

IL6_

16.8

2.9

0.7

0.3

2.9

6.8

0

1.4

m

19.4

64

14

7

&P.

164

1

23

163

ill

332

1,586

GDP

4.0

0.9

0.4

_LP_

10.4

0

1.5

mi

20.9

117

34

14

ill

292

0

53

277

ili

591

2,708

4.3

1.3

0.5

4.7

10.8

0

1.9

mi

21.8

186

70

23

ili

450

-2

130

416

-47

946

4,039

4.6

1.7

0.6

Al

li.l

-0.1

3.2

mi

23.4

247

107

41

ill

567

58

184

502

iM

1,252

5,514

4.5

1.9

0.7

.M

10.3

1.1

3.3

.2J.

22.7

SOURCE: Congressional Budget Office.

NOTE: Numbers may not add to totals because of rounding. Total outlays are net of offsetting receipts.

a. Consists mainly of food stamps. Supplemental Security Income, family support payments, child nutrition programs,

student loans, the earned income tax credit, agricultural price supports, federal civilian and military retirement

benefits, unemployment compensation, veterans' benefits, and other social services.
The composition of mandatory spending has changed noticeably since

the mid-1970s. In 1975, Social Security, Medicare, and Medicaid accounted

for slightly more than 50 percent of mandatory spending. By 1990, these three

programs made up just under 70 percent of mandatory spending. Most of this

growth occurred in Medicare and Medicaid, which doubled from 13 percent

of mandatory outlays and 1.3 percent of GDP in 1975 to 26 percent of

mandatory outlays and 2.6 percent of GDP in 1990.

PROJECTIONS OF MANDATORY SPENDING

AND OTHER OUTLAYS THROUGH 1997

Looking ahead to the next five years, CBO estimates that under current laws

and policies total net federal spending will peak as a percentage of GDP at

24.9 percent in 1992 and then fall to 22 percent by 1995 (see Table 2).4

Discretionary spending is projected to continue to decline as a share of GDP

through 1997 (assuming that it is constrained by the legal limits on

discretionary spending through 1995 and that it grows at the rate of inflation

thereafter). Spending on mandatory programs, however, is projected to

increase moderately through 1997, rising from 11.3 percent of GDP and

48 percent of federal outlays hi 1991 to 12.4 percent of GDP and 57 percent

of outlays in 1997.

Although CBO estimates that mandatory spending will increase only

moderately as a share of GDP through 1997, outlays for Medicare and

Medicaid will continue to rise sharply, both as a percentage of mandatory

spending and as a percentage of GDP. CBO estimates that Medicare and

Medicaid will increase from 2.9 percent of GDP in 1991 to 4.4 percent hi

1997, a 52 percent increase in just six years. As a proportion of mandatory

spending, Medicare and Medicaid will rise from 26 percent hi 1991 to 35

percent hi 1997.

In contrast, Social Security is expected to remain virtually unchanged

as a share of GDP through 1997, while falling slightly as a share of mandatory

spending, from 42 percent hi 1991 to 38 percent in 1997. Entitlements other

than Social Security, Medicare, and Medicaid are projected to decline from

3.6 percent of GDP in 1991 to 33 percent hi 1997, and to fall from 32 percent

of all mandatory outlays to 26 percent.

4. Three factors will contribute to the decline in federal spending as a share of GDP after 1992: the

economy's recovery from recession, falling outlays for deposit insurance, and the effect on discretionary

outlays of the caps put in place by the Budget Enforcement Act, (Title Xffl of the Omnibus Budget

Reconciliation Act of 1990).
TABLE 2. CBO BASELINE PROJECTION OF FEDERAL OUTLAYS

THROUGH 1997 (By fiscal year)

Actual

1991 1992 1993 1994 1995 1996 1997

In Billions of Dollars

Mandatory Programs

Social Security

Medicare

Medicaid

Other mandatory outlays*

Subtotal

267 285 301 318 335 354 374

114 128 143 159 177 198 220

53 68 80 89 100 113 126

202 229 227 231 236 238 256

636 710 751 797 848 903 977

Deposit Insurance

Net Interest

Discretionary Spending

Offsetting Receipts

Total Outlays

Gross Domestic Product

66 65 69 33-1 7 -45 -29

196 201 214 232 246 262 280

532 548 543 536 539 556 575

-108 -69 -67 -69 -73 -74 -77

1,323 1,455 1,510 1,529 1,543 1,602 1,726

5,627 5,846 6,237 6,621 7,004 7,414 7,849

As a Percentage of GDP

Mandatory Programs

Social Security

Medicare

Medicaid

Other mandatory outlays"

Subtotal

Deposit Insurance

Net Interest

Discretionary Spending

Total Outlays

4.7

2.0

0.9

1.2

3.5

4.9

2.2

1.2

4.8

2.3

1.3

4.8

2.4

1.3

.Li

4.8

2.5

1.4

4.8

2.7

1.5

1.1

3.4

1.1

3.4

JL1

0.5

3.5

_SJ.

-0.2

3.5

JJ.

4.8

2.8

1.6

-Li

11.3 12.1 12.0 12.0 12.1 12.2 12.4

-0.6 -0.4

3.5 3.6

.Li _L1

23.5 24.9 24.2 23.1 22.0 21.6 22.0

SOURCE: Congressional Budget Office.

NOTE: Numbers may not add to totals because of rounding.

Total outlays are net of offsetting receipts.

a. Consists mainly of food stamps. Supplemental Security Income, family support payments, child nutrition programs,

student loans, the earned income tax credit, agricultural price supports, federal civilian and military retirement

benefits, unemployment compensation, veterans' benefits, and other social services.
These figures illustrate a long-term trend in which mandatory

programs-and especially Social Security, Medicare, and Medicaid-have

become the most significant contributors to the growth of federal spending.

CBO's projections indicate that mandatory spending will continue to grow as

a share of total federal spending in the 1990s and that Medicare and

Medicaid will fuel this growth. Social Security outlays, however, will rise only

slightly faster than overall government spending, and Social Security spending

should remain fairly stable as a share of GDP through the late 1990s.

PROJECTIONS FOR INDIVIDUAL

MANDATORY PROGRAMS THROUGH 1997

From 1991 through 1997, mandatory spending is projected to increase by

$341 billion, from $636 billion to $977 billion (see Table 3). This reflects an

average annual rate of growth in nominal outlays of 7.4 percent, about 25

percent faster than the growth rate from 1985 through 1991 (see Table 4). (In

contrast, average yearly growth rates for net federal outlays and for nominal

GDP are projected to be 4.5 percent and 5.7 percent, respectively, during the

1991-1997 period, assuming current laws.) Two programs-Medicare and

Medicaid-are projected to exceed the average rate of growth of all

entitlement spending in each year of the projection period.

More than half of the projected increase in mandatory spending

through 1997 is directly attributable to increased spending for Medicare and

Medicaid. Nominal outlays for Medicare are projected to rise at an average

annual rate of 11.6 percent from 1991 through 1997, even faster than between

1985 and 1991 when they rose by an average rate of 8.6 percent a year.

Medicaid outlays are also expected to continue to rise rapidly-by an average

of 15.8 percent per year, from $53 billion in 1991 to $126 billion in 1997. By

1997, according to CBO's estimates, nominal expenditures for Medicaid will

have risen an astounding 450 percent since 1985, increasing from $23 billion

to $126 billion. In the same period, Medicaid will have risen from 5.1 percent

of mandatory spending and 2.4 percent of all federal outlays to 13 percent of

mandatory spending and 73 percent of federal outlays.

In comparison, Social Security spending will rise by an average of

5.8 percent a year from 1991 through 1997, slightly less than the 6.2 percent

average annual increase from 1985 through 1991. Nevertheless, Social

Security and government retirement and disability programs for the civil

service, military, and railroads will account for an estimated 38 percent of the

growth in mandatory outlays from 1991 through 1997.
TABLE 3. CBO BASELINE PROJECTION OF MANDATORY OUTLAYS

THROUGH 1997 (By fiscal year, in billions of dollars)

Actual Change

1991 19921993 1994 1995 1996 1997 1991-1997

Social Security 267 285 301 318 335 354 374 107

Medicare 114 128 143 159 177 198 220 106

Part A 69 76 84 92 102 112 123 54

Part B 46 52 59 67 76 86 97 52

Medicaid 53 68 80 89 100 113 126 73

Civil Service, Military, and

Railroad Retirement 64 66 68 72 75 81 86 22

Unemployment Compensation 25 35 26 25 26 26 27 2

Food Stamps 19 22 22 22 22 23 24 5

Supplemental Security

Income8 15 17 18 21 22 21 25 10

Family Support Payments 14 15 16 16 17 18 18 4

Veterans' Compensation

and Pensions8 16 16 17 19 18 17 19 3

Farm Price Supports6 10 9 11 10 9 9 9 -1

Other Mandatory Spending 39 48 49 46 47 42 48

Total Mandatory

Outlays 636 710 751 797 848 903 977 341

SOURCE: Congressional Budget Office.

a. In 1994, Supplemental Security Income and Veterans' Compensation and pensions will have 13 payments. In 1996,

these programs will have 11 payments. In these programs, payments are shifted to the prior fiscal year whenever

the first day of the fiscal year falls on a weekend or a holiday.

b. Data are discontinuous from previous yean due to the effects of credit reform beginning in 1992.
TABLE 4. AVERAGE ANNUAL RATE OF GROWTH OF MANDATORY

SPENDING, 1985-1997

Average Annual Percentage Chanee

1985-1991

Social Security

Medicare

Part A

PartB

Medicaid

Civil Service, Military, and Railroad Retirement

Unemployment Compensation

Food Stamps

Supplemental Security Income

Family Support Payments

Veterans' Compensation and Pensions

Farm Price Supports

Other Mandatory Spending

Total Mandatory Outlays

6.2

8.6

6.2

13.0

15.0

6.0

8.0

8.1

9.1

7.8

2.2

-9.0

-4.8

5.9

1991-1997

5.8

11.6

10.2

13.5

15.8

5.2

0.7

4.0

9.4

5.3

2.7

-1.4

3.5

7.4

SOURCE: Congressional Budget Office.

8
Mandatory programs other than Social Security, government retirement

benefits, Medicare, and Medicaid are expected to grow more slowly than

spending on health and retirement programs hi the 1991-1997 period,

increasing by an average of 3.5 percent a year compared with a projected

average increase of 83 percent a year for all health and retirement

entitlements combined. These other entitlement programs-family support

payments, Supplemental Security Income (SSI), Food Stamps, Unemployment

Compensation, Veterans' Compensation, agricultural price supports, and all

other noninterest and non-deposit-insurance mandatory programs-will account

for only 10 percent of the growth in entitlement spending from 1991 through

1997, according to CBO's estimates. To be sure, some of the programs, such

as family support payments and SSI, will grow steadily through this period, but

their growth will be partly offset by the declining outlays projected in some

years for Unemployment Compensation, farm price supports, and some other

programs. Overall, however, declines in other mandatory programs will not

be nearly enough to compensate for the significant growth in spending for

Medicare, Medicaid, Social Security, and government retirement benefits.

In the light of large and continuing federal deficits and the continuing

growth of mandatory programs relative to the rest of the budget, these

programs are attracting greater attention as a potential source of savings.

Slowing the growth of mandatory spending could reduce the deficit or provide

funds for additional discretionary spending. Effectively controlling the growth

of mandatory spending will require an understanding of the factors driving the

growth of these programs.

SOURCES OF GROWTH IN MANDATORY SPENDING

CBO estimates that by 1997 spending for entitlements will be $267 billion

higher than in 1992, an increase of 38 percent. One-quarter of that increase,

$69 billion, will result from cost-of-living adjustments (COLAs) in Social

Security, civil service and military pensions, Supplemental Security Income,

and other indexed programs (see Table 5). (Social Security alone will account

for almost three-fourths of the increase in spending because of COLAs.)

These estimates assume that cost-of-living adjustments will average roughly

3.5 percent per year over the next five years.
TABLE 5. SOURCES OF CHANGE IN TOTAL MANDATORY SPENDING,

FISCAL YEARS 1992-1997 (In billions of dollars)

1992 1993 1994 1995 1996 1997

Baseline Outlays for

Mandatory Programs 710 751 797 848 903 977

Change in Outlays

Attributable to Each Source

Cost-of -living adjustments

Change in number of recipients

Increased cost of medical care*

Utilization and intensity of

medical care

Higher initial benefits for new

Social Security beneficiariesb

Other causes

Total Changes from 1992 Baseline

9

2

6

14

5

5

41

23

11

13

28

8

4

87

37

21

22

45

11

2

138

52

31

31

65

14

-1

193

69

41

43

85

17

12

267

SOURCE: Congressional Budget Office.

NOTE: Numbers do not include deposit insurance or net interest payments.

a. Represents program growth resulting from higher medical reimbursement rates.

b. Growth caused by rising real wages and changes in the composition of the beneficiary population.

10
Another $41 billion of the $267 billion increase in mandatory spending

from 1992 through 1997 is expected to result from an increase in the number

of people eligible for entitlement programs. By 1997, the number of people

receiving unemployment benefits is expected to drop significantly (from

12.6 million to 9.8 million) because of a projected improvement in economic

growth and the termination of the temporary extension of unemployment

benefits put into effect in 1991. The number of food stamp recipients is also

expected to decline, though not as dramatically (from 24.9 million to

22.7 million). The effect of these decreases, however, is expected to be

outweighed by increases in the number of recipients of Social Security, SSI,

Medicare, and Medicaid.

Nearly half of the projected increase in entitlement spending from 1992

through 1997 is expected to result from increases in the cost of medical care

or increases in the utilization and intensity of medical care. "Utilization" of

medical services refers to the number of visits to medical providers-mainly

the number of hospital admissions, visits to hospital outpatient facilities or

clinics, and visits to physicians' offices. "Intensity" refers to the process of

providing medical care, including the procedures, equipment, and

Pharmaceuticals used in providing that care. As new technologies and

procedures have been developed and adopted by the medical profession, the

intensity of medical services has increased.

The effect of improved technologies and procedures on the value of

medical care is very difficult to capture in price indexes. To the extent that

increases in the price of medical care are the result of improvements in the

effectiveness of medical treatment, these higher prices represent an increase

in the value of medical care rather than inflation. Despite the cost

containment strategies adopted by Medicare in recent years and the efforts

of states to control Medicaid expenditures, spending for these two programs

has not been insulated from the effects of inflation and greater utilization and

intensity of medical goods and services.

Most of the remaining growth in entitlement spending from 1992

through 1997 will come from higher initial benefits for new Social Security

beneficiaries, who will generally have higher real earnings than workers who

retired earlier. As an example, workers who retired in December 1985

received average monthly Social Security benefits of $538 in 1990 dollars;

workers who retired in December 1990 received average monthly benefits of

$559. The difference is due mainly to the higher real earnings of workers who

retired in 1990.

11
These sources of growth play differing roles in the various entitlement

programs, as Table 6 shows. For instance, outlays for COLAs have a

relatively large impact on spending for Social Security and government

retirement plans ($62 billion over five years), compared with increases in the

number of beneficiaries ($27 billion) and rising real benefit levels

($21 billion).

In the Medicare and Medicaid programs, there are two striking

features of the sources of growth. First, increases in enrollment account for

about one-fifth of the projected rise in Medicaid spending, compared with

about one-tenth of the projected rise in Medicare (Parts A and B combined).

Since the economy is projected to grow fairly steadily throughout the 1992-

1997 period and unemployment is projected to decline, economic conditions

will probably not be the driving force behind rising Medicaid enrollment. It

is more likely that expanding Medicaid enrollment will result from the

expansions in Medicaid eligibility enacted since the mid-1980s and the

continuing decline in the percentage of the population covered by employerbased group health insurance.

Another notable characteristic of the Medicare and Medicaid programs

is the share of growth caused by rising reimbursements for medical care and

by greater utilization and intensity of services. CBO estimates that from 1992

through 1997 the consumer price index for medical services will rise at an

average rate of 7.2 percent per year, twice as fast as the general rate of

inflation. Although reimbursement rates in the Medicare program are set by

the federal government and Medicaid rates are set by the state governments,

and neither is tied directly to the consumer price index for medical services,

reimbursement rates in both programs are influenced by inflation in the

market for medical services. CBO's projections also assume a continued rapid

increase in the utilization and intensity of Medicare and Medicaid services

over the next five years. More than half of the projected combined increase

in Medicare and Medicaid expenditures from 1992 through 1997 is

attributable to increased utilization and intensity of medical services.

About 34 percent of the increase in Medicaid spending from 1992

through 1997 is expected to result from rising reimbursements for medical

services, and about 47 percent from increased utilization and intensity of

medical care. Part A of the Medicare program, which pays for inpatient

hospital services, is expected to follow a similar pattern: about 40 percent of

its projected spending increase results from higher medical prices, and about

47 percent from increased utilization and intensity of medical services. (In

both programs, the remaining increase will come mainly from larger

caseloads.)

12
TABLE 6. SOURCES OF CHANGE IN SPENDING FOR INDIVIDUAL MANDATORY

PROGRAMS, FISCAL YEARS 1992-1997 (In billions of dollars)

Social Security

Medicare Part A

Medicare Pan B

Medicaid

Civil Service,

Military, and

Railroad Retirement

Unemployment

Compensation

Food Stamps

Supplemental

Security Income

Family Support

Payments

Veterans'

Compensation

and Pensions

Other Mandatory

Programs

Total

1992

Outlays

285

76

52

68

66

35

22

17

15

16

_57

710

1997

Outlays

374

123

97

126

86

27

24

25

18

19

_57

977

Change

1992-1997

89

47

45

58

20

-8

2

8

3

2

0

267

Sources of Change

Price of

Medical

COLAs Caseload Care"

50 23

0 6

0 4

0 11

12 4

0 -12

0 -2

4 4

0 1

3 0

_o _J

69 41

0

19

5

20

0

0

0

0

0

0

_o

43

Use of

Medical

Careb

0

22

36

27

0

0

0

0

0

0

_o

85

Other0

17

0

0

0

4

4

4

0

2

0

_*

29

SOURCE: Congressional Budget Office.

NOTES; Numbers may not add to totals because of rounding. COLAs are cost-of-living adjustments.

a. Reflects growth resulting from higher medical reimbursement rates.

b. Reflects growth resulting from greater utilization and intensity of medical services.

c. In Social Security, this category reflects rising real wages and the changing composition of the beneficiary

population. In Civil Service, Military, and Railroad Retirement, it primarily reflects real wage growth. In family

support payments, it reflects increases in nominal benefits and increasing average family size in the program.

13
In Part B of the Medicare program, which pays for physician services,

only 11 percent of the increase in outlays from 1992 through 1997 is projected

to result from higher prices for medical services, largely because of limits on

fees paid to physicians by Medicare. Nevertheless, the percentage increase

in total Part B expenditures by 1997 is projected to exceed that of either

Part A or Medicaid. Eighty percent of the projected increase in Part B

spending is expected to come from increasing utilization and intensity of

services. (In its estimate of Part B expenditures, CBO has assumed that

limiting increases in physician reimbursements will not be sufficient to control

the growth of total expenditures in the Medicare Supplementary Medical

Insurance program.)

MANDATORY CAPS AS A MEANS

OF CONTROLLING ENTITLEMENT SPENDING

The Budget Enforcement Act of 1990 (BEA) placed caps on the level of

discretionary spending through fiscal year 1995 and required increases in

revenue or reductions in outlays to pay for new mandatory spending. The

BEA placed no constraints, however, on the growth of mandatory programs

as they exist in current law. Persistent large budget deficits since the passage

of the BEA have focused increased attention on the growth of mandatory

spending. The President's 1993 budget included a proposal to cap the growth

of mandatory spending, and bills introduced in both the House and Senate

in 1992 would implement this policy. These bills would limit the annual

increase in spending on mandatory programs to the percentage change in the

number of beneficiaries, plus the percentage increase in the consumer price

index, plus an additional fixed percentage. All mandatory spending except

Social Security would be subject to the cap, and any spending in excess of the

cap would cause a sequestration of funds that would reduce outlays in each

direct spending account by a uniform percentage in order to cut mandatory

outlays to the level permitted by the cap.

CBO estimates that under such a cap mandatory spending would not

be affected until 1997, when it would be reduced by $15 billion (see Table 7).

If, however, the cap were set to equal only the percentage increase in

enrollment plus inflation, mandatory outlays would fall by $11 billion in 1993,

$20 billion in 1994, and $76 billion in 1997.

5. H.R. 4150 and S. 2217,102nd Congress, second session.

14
TABLE 7. PROJECTED MANDATORY SPENDING UNDER A CAP ON

GROWTH (By fiscal year, in billions of dollars)

1993 1994 1995 1996 1997

All Mandatory Spending Except Social Security

Baseline Outlays

Projected Outlays with Cap

Equal to:

Enrollment, Inflation, Plus 2.5 Percent

Estimated Savings

Enrollment, Inflation, Plus 2 Percent

Estimated Savings

Enrollment, Inflation, Plus 1 Percent

Estimated Savings

Enrollment Plus Inflation

Estimated Savings

450 479 513 549 602

450

0

448

2

443

7

439

11

479

0

477

2

468

11

459

20

513

0

510

3

495

18

481

32

549 587

0 15

544 579

5 23

524

25

552

50

504 526

45 76

All Mandatory Spending, Including Social Security

Baseline Outlays

Projected Outlays with Cap

Equal to:

751 797 848 903 977

Enrollment, Inflation, Plus 2.5 Percent

Estimated Savings

Enrollment, Inflation, Plus 2 Percent

Estimated Savings

Enrollment, Inflation, Plus 1 Percent

Estimated Savings

Enrollment Plus Inflation

Estimated Savings

751

0

751

0

746

5

739

12

797

0

797

0

788

9

773

24

848

0

848

0

834

14

811

37

903

0

903

0

883

20

850

53

968

9

964

13

934

43

891

86

SOURCE: Congressional Budget Office.

NOTES: Caps limit the growth of outlays to the percentage growth in enrollment, plus the percentage

change in the consumer price index, plus a fixed add-on percentage.

15
Including Social Security in the various caps shown in Table 7 would

increase the amount of mandatory spending permitted under three of the

options because Social Security outlays are growing at a slower rate than the

caps permit. Only a cap that limited growth to the increase in enrollment

plus inflation would reduce mandatory spending more if Social Security were

included under the cap than if it were not.6 If Social Security were included,

its outlays would be subject to sequestration just like any other mandatory

program. In other words, if total mandatory spending exceeded the amount

permitted under the cap, Social Security outlays would be cut, whether or not

growth in Social Security outlays exceeded the amount implied by the cap for

that program.

Proposals to cap the growth of mandatory programs raise many

questions. For instance, how would such a cap be implemented? Would

benefit amounts and reimbursement rates be reduced, or would new

applicants be denied access to the programs once the cap on expenditures was

reached? If the latter, how would this be accomplished? Not all mandatory

programs are likely to grow faster than the proposed cap would permit.

Should outlays be cut for all programs if spending for a few programs pushed

total mandatory spending over the limit? Or should spending be cut only in

those programs growing faster than the cap prescribes? Would caps on

Medicare and Medicaid spending merely shift more of the cost of medical

care to private payers, nonprofit organizations, and state and local

governments?

Because of their rapid growth, Medicare and Medicaid are the

programs most likely to cause mandatory spending to exceed the amount

permitted by a cap of the type proposed in the Congress (see Table 4).

Capping the growth of all mandatory spending may appear to be one way to

control the growth of Medicare and Medicaid without debating the thorny

issues of what services to eliminate, what payments to health care providers

to reduce, which beneficiaries to cut from the rolls, or what premiums,

coinsurance, or other fees to raise. Even an across-the-board cap on

mandatory spending, however, does not obviate the need to decide how to

implement the caps within each program. Because such a cap would limit the

growth of Medicare and Medicaid, the means to control the growth of these

two programs would still have to be put in place.

A cap that limited the growth of outlays to the percentage change in enrollment plus the percentage change

in prices would make no allowance for the growth in Social Security benefits caused by rising real wages,

which have increased by an average of about 1 percent a year since the mid-1970s. It should also be noted

that the expenditure caps in S. 2217 and H.R. 4150 would not limit the growth of each mandatory program

to the rate of growth of enrollment in that program plus the rate of inflation. Rather, these growth rates

would be used to set an overall cap on mandatory expenditures. If mandatory expenditures exceeded the

cap, spending on all mandatory programs would be reduced by a uniform percentage.

16
OPTIONS FOR SLOWING THE GROWTH OF SOCIAL SECURITY,

MEDICARE, AND MEDICAID

The Congressional Budget Office has prepared estimates for many proposals

that would reduce spending for mandatory programs or tax some of the

benefits paid by these programs.7 A thorough discussion of these proposals

is beyond the scope of this memorandum, but it may be useful to describe

briefly some of the options most often suggested for reducing the rate of

growth hi expenditures for Social Security, the biggest entitlement program,

and for Medicare and Medicaid, the two fastest growing entitlements.

Social Security

Among the most frequently proposed options for reducing spending for Social

Security and the civil service and military retirement programs are limiting

annual cost-of-living adjustments, increasing the age of eligibility for full

benefits, adjusting the benefit formula to lower the initial benefit amount, and

subjecting a greater proportion of benefits to income tax.8 All of these

options involve trade-offs in terms of ease of implementation, fairness for

people at the same income level (horizontal equity), fairness for people at

different income levels (vertical equity), and the amount by which the options

would either cut spending or raise revenue.

Reducing COLAs, for example, could save a significant amount of

money. CBO has estimated that eliminating COLAs for one year in the

Social Security and Railroad Retirement programs would save $41 billion over

five years, and limiting the COLAs to two-thirds of the increase in the

consumer price index each year for five years would save $46 billion.9

Reducing COLAs, however, would place a relatively greater financial burden

on Social Security recipients at the low end of the income distribution, for

whom COLAs represent a larger share of total income, than on better-off

beneficiaries. Furthermore, if COLAs were eliminated or permanently

reduced to a level below the general increase in inflation, the real value of

Social Security benefits would erode over time, forcing more older retirees

into poverty as they depleted their savings and other assets and came to rely

on Social Security to meet more of their expenses. (Most private pension

7. See Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options (February 1992).

8. Estimated savings from reducing Social Security COLAs, altering the benefit formula, and taxing more

benefits can be found in CBO, Reducing the Deficit.

9. Ibid.

17
benefits are not fully indexed to inflation, so these too erode in value over

time.) Some of the savings to the Social Security program from cutting

COLAs could be lost if, as a consequence, more elderly people fell into

poverty and became eligible for Supplemental Security Income and Medicaid.

The age at which a person is eligible for full Social Security benefits

has already been raised (prospectively), and some policy analysts believe it

should be raised further. Under the 1983 amendments to the Social Security

Act, the age of eligibility for full benefits will rise to 65 years and two months

in the year 2000 and will increase in a series of steps in later years, reaching

age 67 in the year 2022. A further increase in the retirement age would

reduce Social Security expenditures, either by reducing the number of years

over which full benefits would be paid, or, for early retirees, by paying a lower

percentage of the full benefit. Because of increases in longevity and the large

number of new beneficiaries beginning around 2008, when the first of the

baby-boom generation will retire, the ratio of workers to retirees will begin

to drop early in the next century. This drop will necessitate increases in the

payroll tax or other taxes in order to maintain the level of retirement benefits.

Raising the age of eligibility for full benefits would lessen the need to raise

taxes to maintain the level of Social Security benefits. Increasing the age of

eligibility is also likely to induce workers to postpone retirement, thereby

raising the levels of national income and output.

Raising the age of eligibility for full Social Security benefits does have

disadvantages. The long delay before the retirement age can be raised would

postpone savings until well into the future, but it is necessary to allow current

workers to plan and prepare adequately for their retirement. Also, the

incentive to continue working that raising the age of eligibility provides is

likely to fall disproportionately on low-income workers, for whom Social

Security constitutes a greater percentage of retirement income. They would

be less likely than high-income workers to have other financial resources to

replace the Social Security benefits lost by reducing benefits paid to early

retirees.

Altering the benefit formula to lower the initial Social Security benefit

would offer at least one advantage over cutting COLAs or raising the age of

eligibility: it could easily be designed so that the burden of reduced initial

benefits would not be borne more heavily by low-income retirees than by

high-income ones. A new benefit formula could also be flexible in terms of

the amount of savings it would generate, and if COLAs were left in place, the

value of the benefit would not erode over time. CBO has estimated that

reducing the benefits of newly eligible retired workers by 3 percent beginning

in 1993 would save $4.7 billion in Social Security outlays over five years.

18
Increasing the amount of Social Security benefits subject to income tax

could also generate significant savings. For instance, the Congressional Joint

Committee on Taxation (JCT) has estimated that including 50 percent of all

Social Security benefits in adjusted gross income (rather than 50 percent of

benefits over a threshold amount, as under current law), would raise tax

revenues by almost $45 billion over five years. The JCT has also estimated

that if the threshold level were retained but the amount of benefits over the

threshold included in adjusted gross income were raised to 85 percent, income

tax revenue would rise by $29 billion over five years.

Besides generating substantial revenue from Social Security benefits,

the income tax system allows for progressive taxation that would help avoid

placing an excessive burden on low-income retirees, and its system of rates

and deductions would allow flexibility in adjusting the amount of revenue

generated. If COLAs were retained, benefits would be protected from

inflation because income tax brackets are indexed to the consumer price

index. Taxation of benefits is also more consistent with the social insurance

concept underlying Social Security than is the type of means-testing used in

welfare programs. Nevertheless, because the formula used to calculate Social

Security benefits replaces a higher percentage of earnings for low-wage

workers than for high-wage workers, some higher-income retirees might

believe that they would be overtaxed if income taxes on their benefits were

increased.

Medicare

The most frequently discussed proposals for cutting the rate of growth of

Medicare spending fall into four broad categories: reducing the rate of

reimbursement to providers of Medicare services; cutting the number of

services covered by Medicare; increasing beneficiaries' financial liability for

medical care through higher premiums, deductibles, or copayments; and

tightening eligibility standards in order to slow the growth of Medicare

enrollment. CBO has published estimates of potential savings for many

variants of these proposals.10 Although specific proposals for reducing the

growth of Medicare expenditures are too numerous and complex to be

discussed here fully, several factors are common to most such proposals. Any

option for reducing Medicare spending must be evaluated with regard to its

effects on access to care, quality of care, quantity of care, and costs hi other

sectors of the Medicare program or in Medicaid.

10. Estimated savings for many of the proposals are provided in CBO, Reducing the Deficit.

19
One way to cut the growth of Medicare spending is simply to make

fewer people eligible. For instance, reduced Social Security retirement

benefits now begin at age 62, but Medicare coverage is not available to

retirees until age 65, so early retirees do not have access to the program.

However, the age at which retirees are eligible for full Social Security benefits

is scheduled to begin rising in the year 2000. If the age of eligibility for

Medicare also rose, some savings would be realized in the Medicare program.

Some of that savings would be lost, however, if people made ineligible for

Medicare became eligible for Medicaid.

Some proposals to reduce Medicare spending could have unintended

effects on access to health care, which could further reduce Medicare costs

but might have unintended effects on the health of the program's

beneficiaries. If reimbursements to health care providers were cut below the

point at which it is economical for physicians to treat Medicare patients, for

instance, some providers might begin to reduce the number of Medicare

patients they treat. If access to primary care physicians were impeded,

Medicare beneficiaries might begin to receive more of their care in hospital

inpatient and outpatient settings, where treatment tends to be more costly

than in a physician's office. Proposals to cut Medicare costs must therefore

be evaluated with respect to their effect on access to care as well as their

effect on the program's cost.

Proposals to cut Medicare costs could also indirectly affect quality of

care. Although the requirements of civil and criminal law, as well as the

professional ethics of health care providers, might seem sufficient to guarantee

that Medicare enrollees would receive the same treatment as other patients

regardless of the generosity of the program relative to other insurers,

experience with the Medicaid program indicates that access and quality may

indeed suffer when reimbursement rates are relatively low.11

Sometimes it is difficult to discern whether a cost-cutting measure has

also affected quality of care. For example, since Medicare adopted a

prospective payment system based on diagnosis-related groups (DRGs) for

hospital reimbursement in 1983, the quantity of inpatient hospital care

provided per Medicare enrollee, as measured in terms of the average number

of inpatient days per year, has fallen. The DRG system also appears to have

reduced the level of expenditure per enrollee per hospital admission from

11. Sec Physician Payment Review Commission, Annual Report to Congress, 1991 (March 1991), Chapters 15

and 16; Institute of Medicine, Improving the Quality of Care in Nursing Homes (Washington, D.C: National

Academy Press, 1986); and B. Yudkowsky and others, "Pediatrician Participation in Medicaid: 1978 to

1989,' Pediatrics, vol. 85, no. 4 (April 1990).

20
what it would otherwise have been.12

 Evidence is mixed, however, on

whether the shorter hospital stays under the DRG system have adversely

affected patients' health.

In summary, efforts to reduce the cost of Medicare can have

implications for access to care, quality of care, and quantity of care. Also,

reducing expenditures in one area of the program can raise costs elsewhere

in the program or in other programs, such as Medicaid. These few examples

underscore the complicated interactions resulting from efforts to control the

growth of Medicare expenditures, especially when such efforts are made

without complementary reforms in Medicaid and other types of health

insurance.

Medicaid

At least two of the proposals for reducing Medicare expenditures-namely,

cutting reimbursements and increasing cost sharing-have little relevance for

the Medicaid program. Medicaid reimbursement rates are in general already

lower than the rates paid by Medicare, which in turn are lower than

reimbursement rates typically paid by private insurers. Some studies have

indicated that Medicaid's low rates of reimbursement limit the health care

services available to Medicaid enrollees from hospitals, physicians, and

nursing homes.14 Some providers have claimed that Medicaid reimburses

them at rates below the cost of care, that it pays claims more slowly than

other insurers, and that it denies payment more frequently than other insurers.

All of these factors can dissuade health care providers from participating in

Medicaid. In recent years, health care providers in many states have sued

state Medicaid agencies on the grounds that the reimbursements paid by

Medicaid are not "reasonable and adequate" as required by law. Many of

these suits are still pending, but several have been successful in forcing state

Medicaid agencies to raise the reimbursements paid to hospitals and nursing

homes.

12. Admissions per eorollee are also down from the early 1960s, indicating that sooner stays are not resulting

in more admissions. It is not known, however, whether shorter hospital stays are affecting the number of

outpatient visits or physician visits, both of which have increased on a pcr-cnrollee basis since the early

1980s. (One reason for instituting the Medicare DRG system of reimbursement was to shift some inpatient

hospital care to these less costly settings.) Use of both nursing home care and home health care also rose

after the implementation of the DRG system, partially offsetting the savings in hospital expenditures.

13. R. Coulam and G.Gaumer, "Medicare's Prospective Payment System: A Critical Appraisal,* Health Cart

Financing Review, Annual Supplement, 1991.

14. See Physician Payment Review Commission, Annual Report to Congress, 1991; Institute of Medicine,

Improving the Quality of Care in Nursing Homer, and Yudkowslcy and others, 'Pediatrician Participation in

Medicaid.'

21
Shifting more of the cost of medical care to Medicaid recipients would

be as difficult as cutting reimbursements because most recipients have

incomes below the poverty line and have little money available to pay medical

expenses. Some states require nominal copayments for Medicaid services, but

these copayments are not ever likely to become a significant offset to

Medicaid expenditures. Since it is unlikely that Medicaid savings could be

generated by reducing payments to health care providers or by increasing fees

for Medicaid enrollees, other options must be found if the increase in

Medicaid spending is to be slowed.

One proposal for cutting Medicaid expenditures is to pay for fewer

services, or to pay for services only under certain conditions or in specific

settings. Federal law lays out a core set of required Medicaid services,

including inpatient hospital care, physician services, and nursing facility

services, and a group of optional services, including optometry services, dental

services, prescription drugs, and many others. One way to reduce spending

would be for states to drop optional services and pay only for required

services, or for the federal government to reduce the number of services

eligible for Medicaid reimbursement. A variation on this option would be to

pay for some services only in certain circumstances or settings (as outpatient

procedures rather than inpatient procedures, for example).

Just as the Medicaid statute requires that some services be covered

while leaving coverage of others to the discretion of individual states, it also

requires that specific groups of people be covered but lets the states decide

whether to cover others. Medicaid's eligibility rules are notoriously complex,

but in general Medicaid is an insurance program for poor elderly or disabled

people and for poor children and their mothers. In recent years, several

expansions of Medicaid eligibility have been enacted, some of which states

have been required to adopt and others of which states have had the option

of adopting. Because Medicaid is often the only medical insurance available

to those who are enrolled in the program, and because access to health care

can be a matter of life and death, it is politically difficult for states or the

federal government to take Medicaid coverage away from those to whom it

has already been extended.

Although curtailing eligibility would reduce Medicaid spending

somewhat, it would reduce national health expenditures and the government's

share of those expenditures by a lesser amount. The reason is that

uncompensated care provided by hospitals and physicians generally ends up

being added to the fees charged to people who have other health insurance

or being paid for through government appropriations for public hospitals and

clinics. State and local governments absorb much of the cost of health care

for the uninsured through expenditures for public hospitals and clinics, and

22
the Medicaid program also pays billions of dollars each year to hospitals that

serve a disproportionate share of the Medicaid population and the medically

uninsured. Cutting enrollment in Medicaid could increase these costs.

CONCLUSION

In recent years, experiments in controlling government spending for health

care, particularly in the Medicare program, have shown that piecemeal

approaches to the problem are unlikely to enjoy broad or enduring success.

The process of cutting the growth in health expenditures has been likened to

squeezing a balloon-if you squeeze it in one place, it just bulges out in

another. It may be that controlling the growth of Medicare and Medicaid can

be accomplished only in the context of a more comprehensive reform of the

health care system-one that provides access to adequate health care services

to all who need them and that provides the means for controlling the nation's

total health care expenditures more effectively.

Medicare and Medicaid are not the only sectors of the health care

economy that are growing rapidly. Almost every year for the last three

decades, health care has consumed a larger share of the nation's total output

of goods and services. Yet a large segment of the population, the uninsured,

is denied adequate access to care. Many people are beginning to question

whr* riie continued rapid growth of national health spending is costing in

terms of forgone output in other sectors of the economy. Controlling the

growth of Medicare and Medicaid in a manner that is effective, efficient,

equitable, #nd enduring will require that the nation address health care and

its place in the economy more broadly than just in the context of these two

government programs. The issues of access to health care and the quality,

quantity, and cost of that care will have to be resolved, not just as they relate

to Medicare and Medicaid but as they affect other forms of health insurance

and the economy at large.

23